Tuesday, October 12, 2010

Another Awful NFIB Small Business Survey

This should not surprise anyone, given the regulatory numbers we have been reviewing.

But the October NFIB Small Business Survey is certainly daunting. Positive profit trends -33. Again, many more business owners had to cut prices than could raise prices. This has a lot to do with the poor profit outlook. Higher nominal sales in the last three months came in at -17. Capital spending over the last six months is just 1 point above the 35 year low. Three month hiring plans are ugly too - unadjusted, 16% plan to cut jobs and 8% plan to increase jobs. After seasonal adjustment it is still negative by 3%.

The yammer about small business credit seems pointless based on this survey. Credit demand is mostly restricted to those seeking to cushion cash flow rather than those seeking to expand.

If the Federal government wants to help small businesses, the Federal government should cut regulation and small business taxation substantially. Some businesses out there want to expand, and taking the capital risk is a lot more attractive when you expect higher after-tax profits.

I have noted chipper commentary in the press recently on how well socialized economies with high taxes such as Sweden are doing. Sweden and Denmark embarked on reforms, and for that matter so did Finland. Their corporate tax rates cluster around 25%. Germany keeps reducing its corporate tax rates, with most businesses capped at around 30-33%, and that includes the LOCAL TAXES AS WELL. Contrast that to the US, where state, local and federal corporate tax rates next year in many states will amount to about 50%.

Americans are in denial about why our economy is not competitive. Most of the industrialized world embarked upon a series of competitive reforms over the last decade. We did not.

If Americans want socialism, they will have to go to the Sweden/Denmark model at which individual tax rates will be well over 50%, but corporate tax rates will be more toward 25%. But somehow, I don't think Americans want that. If not, Americans are going to have to figure out what they do want and how to pay for it.

And if what we want is really jobs, then we are going to have to launch a comprehensive reform plan and stick to it. The "green jobs" stuff is mostly nonsense, and almost all of these programs eliminate 3-4 jobs for every job created.

Oh, both Mark and you, Gordon, are going to live to see the American Debt Horizon.

People do not realize how quickly this will happen, because everything is tipping over together. State, local and federal retirements are hitting and the debt was already at outsized levels.

I guess you could argue that we are better off debt-wise than many other industrialized western nations. That is true, but it only buys you a few years. Italy, for example, is already over 110% of GDP.

When the US suddenly finds it needs to run a primary surplus at the state, local and federal level the situation will detonate in an amazing manner.

People are still in deep denial. Cities and municipalities are looking to states for help with debt and retirement obligations, and states are looking to the federal government, and the federal government is looking to the taxpayer. Basically, the "plan" is that Mark is gonna pay for it.

Erp! So are we talking two years, or five on that Vesuvius? There's still a chance of avoiding it, don't you think? It's the sign of the second derivative of debt that seems to cause panic. Get that back down to zero, at least, and the panic ought to subside.

Neil - it is possible, of course. During the Great Depression local finances failed to such an extent that many public workers were paid in scrip for a while.

However we have not yet shown any willingness on any level to buckle down and deal with reality. Only now are the economists beginning to come to grips with the basic fact that trend growth is below 2%.

The public obligations are unpayable. To adjust trend growth upward would require a massive set of structural reforms, including dismantling a lot of regulation, changing fundamentals about environmental law (especially the ability of anyone to sue), cutting corporate tax rates and capital gains rates, and cutting pension and medical benefits to existing retirees as well as the promised benefits to upcoming retirees.

On top of that, we need a bunch of law changes to allow states and some municipalities to do what they need to do.

There will be massive defaults. Trying to ease the defaults and secure the best deal for everyone will be a complex process and right now there is no consensus that we even need to begin the process.

If we could accept reality we could vastly improve our circumstances, but right now the public is not even being told about reality. Therefore they have no knowledge base from which to reach a consensus.